Federal Treasurer
Wayne Swan
is confident investment in the mining sector will drive the economy in 2011, after growth almost stalled during the ­September quarter as higher interest rates cooled spending and exports weakened.

The economy grew at a clip of 0.2 per cent in the September quarter, the slowest pace in nearly two years. Excluding the farm sector, the economy actually contracted by 0.2 per cent.

Export volumes tumbled 2.4 per cent as demand from China for iron ore and coal hit a soft patch, while consumer spending remained weak.

But Mr Swan said Australians should remain “confident" in the economy’s growth prospects.

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AFR

“In a volatile global environment there will be some bumps in the road for our economy, but Australia’s economic fundamentals and growth outlook remains very strong," he said.

Weaker growth will make it harder for the government to achieve its budget deficit reduction targets, and puts into doubt official forecasts pointing to a substantial pick-up in the economy. It also raises questions about whether what Treasury secretary Ken Henry calls Australia’s “three-speed economy" is being poorly ­managed

Shadow treasurer
Joe Hockey
said the slowdown showed the Labor government was “failing to capitalise on what is for Australia a very strong international environment".

The dollar slid to a 10-week low after the release of the Australian Bureau of Statistics gross domestic product data, as investors pushed out expectations of when the Reserve Bank of Australia will next raise interest rates.

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Swaps traders have ruled out any chance of the RBA increasing rates at its meeting next Tuesday.

While most economists agreed that the September-quarter weakness was likely to be only temporary, some warned that the extent of the slowdown could make it more difficult to reach the RBA’s 2010 GDP growth forecast of 3.5 per cent.

Mr Swan said the government remained committed to its fiscal consolidation strategy.

“Australia’s prospects are underpinned by a huge pipeline of business investment, job creation the envy of the developed world and a rapid fiscal consolidation that will see the budget return to surplus in 2012-13 – ahead of every major advanced economy," he said.

Mr Swan also attacked Mr Hockey for claiming in a statement that Labor was not doing enough to invest in infrastructure while at the same time urging the government to rein in spending to reduce its deficit and take pressure off interest rates.

“For months and months Joe Hockey has bellowed from the rooftops that he would rip up vital public investment in infrastructure, and in the same breath today says we need to spend more," Mr Swan said.

The 0.2 per cent quarterly GDP increase was only half the 0.4 per cent expected by economists and well down on the 1.1 per cent recorded in the June quarter. Annual growth slid to 2.7 per cent, a lot lower than the long-term trend rate of around 3.25 per cent.

Growth in household consumption more than halved to 0.6 per cent, from 1.4 per cent in quarterly terms.

“The data is certainly a wake-up call to those focusing unduly on the mining boom and neglecting the other 90 per cent of the economy."

RBA governor
Glenn Stevens
wrong-footed financial markets last month when he unexpectedly lifted the overnight cash rate target to 4.75 per cent, from 4.5 per cent.

It was the seventh increase in the official cash rate since October 2009, although the RBA made no changes at meetings in June, July, August, September and October.

But the increase in interest rates to 4.75 per cent, from 3 per cent in October last year, is hurting some parts of the economy, as is the appreciation of the currency stoked by the biggest mining boom in more than a ­century.

The ABS figures showed 11 of 19 industry sectors contracted in the September quarter, with construction dropping 0.9 per cent and mining activity down 0.7 per cent.

Agriculture, forestry and fishing surged 18.5 per cent in the quarter, with farm GDP rising 21 per cent, the fastest quarterly gain in 17 years.

The household savings ratio jumped to 10.2 per cent, while productivity fell by 0.1 per cent in the quarter.

Inflation looked to be under control in the quarter, with the household price deflator up just 0.3 per cent in the three-month period and 2 per cent over the full year.

The RBA and the Treasury are now talking about a “three-speed" economy, made up of fast-growing mining and mining-related sectors, other trade-exposed sectors like manu­facturing that are expanding more slowly, and non-traded sectors growing at a rate somewhere in between.

NSW was the fastest-growing state in the September quarter, with state final demand increasing 1.4 per cent. Western Australia expanded 0.4 per cent, while Victoria posted a contraction of 0.1 per cent and Queensland retreated 0.5 per cent.

Mr Swan cited the uneven growth to rebuff calls by Business Council of Australia president
Graham Bradley
for new initiatives on skills development to contain wage pressures.

“They wanted more spending on education and skills, they wanted a lower company tax rate and they wanted us to come back to surplus at the same time," Mr Swan said of the BCA comments.

“We can’t have everything at once if we actually do want to run a tight ­fiscal policy."

Australia has performed better than most other developed economies over the past year, benefiting from surging demand from China, India and other Asian countries for iron ore, coal and liquefied natural gas.

“China should remain Australia’s most important export market while trade links with India and the emerging markets more generally will deepen," said Sukhy Ubhi, an economist at Capital Economics.

The latest statistics show no let-up in the performance of either the Chinese or the Indian economies.

China’s manufacturing grew at a faster pace in November, while India’s economy expanded 8.9 per cent for a second straight quarter in the three months to September 30.

While Australia’s mining sector and mining-related industries will benefit from continued demand from the world’s two most populous nations, other industries continue to do it tough as they struggle with higher interest rates.

Some sectors of the economy appear to have remained weak in the December quarter, with an index of manufacturing released yesterday showing the sector contracted in November for a third straight month.

The performance of manufacturing index compiled by the Australian Industry Group fell 1.8 points to 47.6, below the 50-point level separating expansion from contraction.

Retail sales and trade data for October, due to be released today, will also show how the economy is faring in the December quarter.